Financial Feasibility of Commercial Development

The following chart is another exhibit from the Angelous’ 2010-2011 Economic Forecast.

Based on this chart, I have compiled a spreadsheet that shows if developing a particular commercial product would be feasible in today’s market with the current rent rates. 

 According to this spreadsheet, office and retail development would be financially feasible from a development standpoint based on market rent rates today.  However, all costs and rates are averaged and, therefore, may not apply to all property types.  Also, with lenders requiring 30% to 40% of equity or more, fewer deals can be made as fewer motivated developers have the equity at hand to initiate development. 

The average rent rates used above are asking rents and not effective rents.  Effective rents take into account all compromises made at the negotiating table that would alter that rent rate.  Marcus & Millichap are the only national brokerage firm that publishes quarterly reports showing effective rents in the Austin area.  The concessions rate adjustment for office and retail was derived by using the percentage difference between the average and effective rent rates reported by Marcus & Millichap.  The concessions rate for the industrial submarket was estimated to be similar to the office market given they both have similar overall vacancy rates.